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Week in Review

Week Ending: Friday, May 18, 2018

Recap & Commentary

US stock returns were mixed in a week of mostly subdued trading volumes. Large caps, per the S&P 500, declined 0.5% as investors shifted attention from strong corporate earnings results to fears that the Fed will raise rates at an accelerated response due to strengthening macroeconomic data. Headlines regarding trade negotiations also weighed on investor sentiment.

Small caps, conversely, extended year-to-date positive performance, gaining 1.2%.  Investors continue to favor small-cap companies because they’re domestically-focused, and should receive greater benefits from corporate tax cuts than their larger peers. Also, small-cap revenues are better shielded from the strengthening US dollar, which is up 4% over the past month. Further, the Russell 2000 has a larger allocation to healthcare than the S&P 500.  The sector was bid higher based on expectations that some of these smaller companies will become acquisition targets.

The 10-Year Treasury yield hit 3.11% on Thursday, its highest level since 2011, before closing the week at 3.06% and marking the first time the yield has ended a week above 3.0% this year. Over the past two years, yields have more than doubled from their historic lows of 1.36% (July 2016), as investors anticipate higher rates of inflation. This rise has driven a sell-off in bond proxy stocks, such as REITs and Utilities, as their higher dividend payments have become less attractive relative to the much safer 10-year Treasury.

Economic Bullet Points

Manufacturing data was robust. Regional data out of the New York and Philadelphia areas was exceptionally strong highlighted by the 45-year high for new orders in the Philly report. It is important to remember that the regional surveys are just that, surveys. They do not report actual manufacturing data and thus can be susceptible to sentiment and tend to be volatile. Actual manufacturing data, published by the Federal Reserve, reported a solid monthly manufacturing gain of 0.5%, led by business equipment, which helped offset declines in vehicle production.

On the surface, housing sector data was weaker in April.  Both housing starts and permits (a leading indicator of future activity) fell, down 3.7% and 1.8%, respectively, from March. However, some weakness was expected following very strong March readings. On a year-over-year basis, the data was more upbeat as both starts and permits rose, up 10.5% and 7.7%, respectively.

Consumer spending, as measured by retail sales, was largely in line with expectations, rising 0.3% in April. However, that represented a marked decrease from March when spending rose an adjusted, and arguably unsustainable, 0.8%.  Gasoline sales rose 0.8% in the month reflecting higher prices at the pump. At the end of April, the national average for unleaded gas stood at $2.81/gallon.  That represents a 5.6% increase from the end of March and a 19% increase from a year ago.  Further increases in prices, which are likely as we enter the busy summer driving season, could result in decreased discretionary spending by consumers.

Of Note

The Vatican issued a scathing rebuke of derivative contracts, focusing on credit default swaps. Specifically, Pope Francis referred to them as “ticking time bombs.”  His remarks were similar to previous comments by Warren Buffet who called the instruments, “weapons of mass destruction.”

Market Indices Week of 5/18

S&P 500                        -0.5%

Russell 2000                  1.2%

MSCI EAFE                  -0.6%

MSCI EM                       -2.3%

Commodities               0.5%

Barclay’s Agg.             -0.5%

US Dollar Index            1.2%

10-Yr Yield                   3.06%

WTI Oil ($/bl)                   $71

Gold ($/oz)                  $1,288

The Week Ahead

  • New Home Sales
  • Existing Home Sales
  • Durable Goods Orders
  • Consumer Sentiment

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